Post Holdings (POST)

OK, so nobody is going to believe me again.  People will think I am just sitting here watching TV and then when I hear something interesting, I look stuff up and make a post about it.  Well, there's nothing wrong with that but that's only part of the story.

I was looking at POST in the past few days for a number of reasons.  I know you are tired of hearing this, but POST is run by an outsider CEO, William Stiritz.  Of course, I knew this and you knew this.  POST was obviously worth a very close look as:

• It's an outsider CEO company and
• It's a spinoff and has the classic signs that Greenblatt talks about in his Genius book (segment suffering from 'benign neglect' for years, ripe for some focused (and incentivized)  improvements via spin-off).

So this is a perfect candidate for a post here (and for a position in any value investor's portfolio). 

What got me to look at this in the past few days was Stiritz making headlines.  He took a big stake in Herbalife (HLF) and said he wants to help do something to get Ackman off their back.  He filed a widely reported 13-D with this note:

Item 4. Purpose of Transaction.

The Reporting Person has analyzed the Company and concluded that it has a sound business model, a strong distribution system and a positive outlook for long-term growth opportunities. The Reporting Person believes that the Company’s market capitalization is undervalued at this time. The Reporting Person plans to interact with Company management to offer them, for their consideration, his views, advice and counsel for ways of promoting and furthering the Company’s shareholder interests. The Reporting Person’s views, advice and counsel may address a wide variety of matters, including ways to further leverage the Company’s strong distribution system, potential financing and/or recapitalization strategies, potential stock repurchase programs, and potential strategies for confronting the speculative short position that currently exists in the Company’s stock and its attendant negative publicity campaign. The Reporting Person may, from time to time (i) acquire additional Shares and/or other equity, debt, or other securities of the Company, (ii) dispose of any or all of his Shares or any other such Company securities, and (iii) engage in hedging or similar transactions with respect to the Shares.

This is fascinating on its own, this ongoing drama; sort of a battle of the titans. 

He owns 6.5 million shares ot HLF which is a stake of $460 million; that's huge.  Stiritz owns 370,000 shares of POST and has options on 1.55 million shares (at a $31.25/share strike price) for a total stake (if options exercised) of $90 million.  That shows you how strongly he feels about HLF.  The POST stake seems a little small, but this is not a founder/owner-type situation and ownership stakes tend to be small in those cases so it's not too much of an issue.

So anyway, that was the trigger for me to pull up some information on POST.  I have been going through the financials (not much since this is a new entity) when CNBC had on a Tiger cub fund manager named Nehal Chopra.

Tiger Ratan Capital
So Nehal Chopra is a Tiger cub; her fund was seeded by Tiger Management (Julian Robertson).  Again, Julian Robertson is a legendary hedge fund manager, but importantly (for us value investors), he is a hard core fundamentals-based value manager.  Robertson and his cubs are known for very deep research.  They won't invest until they do extensive work on the companies and especially their management. 

So of course, I turned around today to watch when I heard this Tiger cub talk about POST.  First of all, Tiger Ratan Capital focuses on corporate change which often causes dislocations and mispricings.  They seek to double money in three years.

Ralston 2.0
For POST, her comment was that the cereal business is a very stable business but at POST has been undermanaged for years, and after the spin-off they are fixing it up.  The most exciting part of POST is the CEO, Bill Stiritz, who at Ralston returned 21%/year for 21 years (that's even higher than the +20%/year for 19 years in the Outsiders book.  See the table in the post). 

She feels that POST is Ralston 2.0 (the only problem is that Stiritz is 78 years old, so we may or may not get another 21 years).

So a fund manager talking about a stock is no big deal, usually, even if it's a stock you like.  You just say, well, OK...

Charter Communications (CHTR) and Valeant Pharmaceutical (VRX)
But what was very interesting to me was that she went on to mention two of her other favorites; Charter Communications (CHTR) and Valeant Pharmaceutical (VRX).   I mentioned CHTR here and do like the stock and what Malone/Rutledge are doing.  Chopra said that CHTR looks good even without a Time Warner Cable deal.  Their capex should come down going forward and they have a lot of free cash flow.

For VRX, she explained the business model; that other small pharmaceuticals spend a lot of money on R&D but in aggregate their return on investment (in R&D) is negative.  So VRX doesn't do that and just buys companies with successful products.

I haven't done a post on VRX, but it was mentioned in the comment section of one of my posts and it
is a big Sequoia position and is sort of an outsider CEO-type situation.

So needless to say, we seem to have similar taste! 

Of course with a manager like this we have to take a look at what else they own.  Here's a link to the recent 13F:  

Tiger Ratan Capital holdings as of September 2013


Back to POST
Anyway, back to POST.  It's a spin-off from early 2012 so in the world of spin-off investing, it's still pretty fresh.  It has all the things that you want; an incentivized, competent management, a business that has been neglected for a long time in a stable industry etc.

Plus we already know about Bill Stiritz.  These things alone make POST very interesting.

But what is exciting about POST is the new businesses that they are investing in.  They have made some acquisitions this year and will close one next year.

Their Attune Foods business (which includes the Hearthside businesses they bought) gives them exposure to organic, non-GMO cereals and snacks and private label granola business.  Natural and organic cereals have a high single-digit growth rates.  And the acquisition is cash accretive in 2014.

Premier Nutrition acquisition represents a three-fold opportunity (according to the 4Q2013 conference call):

1. Access to double-digit growth of sports nutrition and weight loss category.
2. It's POST's first out-of-the-bowl eating experience with Premier line of shakes and bars.
3. Platform from which to initiate roll-up opportunity as industry consolidates.

This is also cash accretive in 2014.  Premier also gives POST knowledge of science of protein.

The Dakota Growers (pasta) acquisition expands the private label business and is also cash accretive in 2014.  Dakota also creates an attractive strategic growth platform (through acquisitions).

So all of these acquisitions seem to have in common higher organic growth rates, platform for future growth through acquisitions while being cash accretive.   That's good!

Valuation
OK, so let's just take a quick look at this.  First of all, POST doesn't look so good on conventional measures like P/E due to the high debt.  There were also a bunch of charges and expenses related to the spin-off and restructuring.

So let's look at what is more important in these situations; EV/EBITDA, free cash flow and things like that.

Fiscal 2013
First of all, they just released their fiscal 2013 results (year ended in September).  Their adjusted EBITDA came in at $216.7 million.   Capex for the first nine months was $18 million, so just annualizing that and assuming $24 million in capex in 2013, that's free cash flow of around $193 million  (capex will be in the 10-K which hasn't been filed yet).

POST closed at around $47/share, so with 33 million shares outstanding, that's $1.6 billion market cap.  They have $1.4 billion in long term debt or $1.0 billion net of cash (which is pretty much going to the purchase of Dakota Growers which will close early 2014).  So that's an enterprise value of around $2.6 billion.

So on fiscal 2013 figures, that comes to 12x EV/EBITDA and 13.5x free cash flow.   That's not expensive at all.  Just plucking easily accessible figures, here are some EV/EBITDA for some comps:

                                   EV/EBITDA (ttm)
Kellogg                      13.3x
General Mills             11.7x
Kraft Foods Group     10.0x
Campbell Soup          11.4x

So just looking at the EV/EBITDA of the past twelve months, the valuation looks pretty normal and within reasonable range.  But then again, we are comparing this to companies with little or no growth, and our assumption is that POST is going to grow rationally and profitably, outsider CEO-like.  In that sense, this 'normal' valuation may in fact be very attractive.

They did offer up guidance for 2014. 

2014 Guidance
Adjusted EBITDA:  $245 - $260 million.
Capex:   $65 - 75 million

Using the midpoint of each would give us $252 million in adjusted EBITDA and $70 million in capex.  That gives us free cash flow of $182 million. 

So the current $2.6 billion enterprise value gives us an EV/EBITDA of 10.3x (this may be fairer as 2013 didn't include full year of 2013 acquisitions but the full balance sheet value was included in EV at September-end).  That's 14.3x free cash flow, though, but still a free cash yield of 7%.  This free cash yield includes all the capex for organic growth, but obviously not growth that will come from acquisitions. 

Conclusion
This is just a quick look at POST, but it looks pretty interesting.  I don't know that you want to compare valuations too much with other food companies that are really big and slow growth.  I would look at POST more as a special situation; as a company in transition run by an outsider CEO.  Plus it's a spin-off play and a relatively fresh one at that as spin-off returns usually are the best a couple of years or more out.

Also, some of the slow-growers in the grocery category are big and find it hard to find incremental growth.  POST may have an advantage there too as they are still pretty small and therefore nimble.

Here are some revenue figures to compare (POST is for the recent year-ended September 2013; others are whatever the most recent full year was):

POST:                  $1 billion
Kellogg:             $14 billion
General Mills:    $18 billion
Kraft:                   $4.5 billion
Cambell Soup:     $8 billion

This is not to say that POST can get to $14 billion or $18 billion in sales.  Not at all.  It's just a lot easier to grow a company with a smaller revenue base.  A $100 million idea will have a much bigger revenue impact on POST than on say, Kellogg.  Obviously this applies to acquisitions too.  An acquisition too small for the other companies may have a reasonable positive impact on POST (larger pond to fish in).

So what's not to like?

• Greenblatt-style spin-off play
• Outsider CEO
• Reasonable valuation (I only say reasonable because I haven't done the work to declare it really cheap)